Pity the poor PBM industry.  Hailed in the early 1990s as the solution to manage health care costs, bought up by the drug industry for far, far too much money in the mid-1990s, and investigated on again/off again by various attorney generals ever since over their relationships with drug manufacturers. In early 2000 due to another investigation, their stock price tumbles and one of the biggest (PCS) gets bought by one of the smallest (Advance Paradigm) at a fire sale price.  So ends the decade, but a funny thing has been happening. Remember that PBMs are supposed to be working on behalf of health plans and employers to get drug costs down.  But overall drug costs have gone up massively all this time (as have brand prices mostly due to the new blockbusters of the 1990s.). But so have the PBMs’ profits and their stock prices.

There are four main lines of revenue for a PBM.  1) Claims processing/transactions with all the formulary stuff and presumably price discounting that goes with it 2) Switching people between different drugs based on rebates from the manufacturers, and doing other drug promotions, 3) mail-order pharmacies, and 4) a loose bunch of activities some companies call health promotion, which also includes DSM, data analysis, etc. Buried somewhere in there is the level of risk they take on from their clients, although the answer seems to be "not too much". No one will give you a straight answer about what proportion of their revenue comes from which activity, which makes Sen. Cantwell (D-WA) suspicious enough to ask them to disclose their deals in the new Medicare legislation.  Until now their mail-order piece was very profitable (and supposedly is why Express Scripts’ market cap is around $5bn, Caremark’s around $6bn but AdvancePCS’ only at $4.5bn although it has far more covered lives than the other two.) Medco is being spun off by Merck next week and it also has a strong mail-order side.  Now they are also under what looks like a pre-emptive strike from the pharmacists who for some reason believe that the PBMs are using their formulary management techniques to steer business to their mail-order divisions — imagine that!

This presages the main question of what role PBMs will play in whatever eventually comes out of Congress on Medicare drug coverage. Are they going to get the biggest bonanza in their history (all those lovely seniors signing up)? Or are they going to lose all their abilities to make money the way they’ve do now, and be turned into government data processing agencies with PE ratios to match? With their stocks recently close to their all time highs, this is a space to be watched.